Remuneration Slash And Inclination To Consume

As per Keynes the effect of a general slash in remuneration on the inclination to consume
will be adverse. Consequently remuneration reductions earnings of the wage-income standards
will drop in association to that of non-wage earners and there will be some redistribution
of earnings in favour of the latter.

This will diminish total consumption as the earnings of remuneration
has a high inclination to consume drop. The wealthy on the other hand has a huge inclination
to save and a less propensity to consume. These causes diminish in total demand, earnings
and employment.

Pigou but, regarded the feasibility when remuneration deduction may
increase the inclination to consume. He argued that as a result of general remuneration
slash, prices will drop and the value of money will increase. With the increase in
the value of money the actual value of money assets such as stocks, shares, bank deposits,
government bonds and securities etc. will increase.

The owners of these fixed assets will feel themselves wealthier than
before and their inclination to consume will be reinforced and the inclination to save
destabilized. This is known as the Pigou Effect which will tend to rise total demand
and employment.

The Pigou effect drops to hike the inclination to consume much due to three factors:

Very less people holds money assets and hence the authority on the overall inclination
to consume is very important.

It is not obligatory that asset possessors may at once raise their inclination
to consume with the increase in the actual value of their money assets. Somewhat
their wish to save may rise.

The stimulating effect of larger real cash balances on consumption may be offset
by the discouraging effect of enhanced actual debt burden on consumption due to
lesser prices and therefore leaving the net effect very small.

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